FHA Guidelines: Are mortgage loan write downs the answer?
October 21st, 2010
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Speaking at an event held by Women in Housing and Finance, FHA commissioner David Stevens said that “[Mortgage] servicers and lenders have got to start writing down principal” for homeowners whose homes are worth less than their mortgage loan balances. Underwater homes create a variety of issues for homeowners, mortgage lenders, and communities:
- Inability to sell: Selling your home when it’s underwater requires your mortgage lender to approve a short sale. This can take months, and potential buyers may withdraw offers in frustration.
- Inability to refinance: Mortgage lenders base their approval of home loans on how much a home is worth. Short refinances are being offered by FHA, but are contingent upon existing mortgage lenders agreeing to write off a minimum of 10 percent of the current mortgage balance; underwater borrowers who could benefit from a mortgage refinance can’t qualify for traditional refinancing.
- Borrowers walking away from “underwater” homes: Homeowners who have lost home value through no fault of their own, and who have tried in vain to work with their mortgage lenders, may abandon homes that hare hopelessly underwater. This leads to more vacant homes and mortgage foreclosures.
- Abandoned homes: Homes abandoned before and during foreclosure may become blighted and magnets for vandalism and other crime. This causes decreasing home values in surrounding areas and loss of property tax revenue for communities.
Commissioner Stevens asserts that writing down mortgage loans to reflect current home values is important for boosting US housing markets; as long as high foreclosure rates and large numbers of bank-owned foreclosed properties are available, housing markets aren’t likely to improve. Writing down mortgage balances could help homeowners avoid foreclosure and allow some of them to refinance into FHA mortgage loans at current FHA mortgage rates. The benefit of writing down mortgage loans seems simple, but it isn’t. Here’s why.
Mortgage investors, and PMI companies: More players in mortgage write down process
Most mortgage loans are sold to investors after they’ve been originated by mortgage lenders; day-to-day loan administration and customer care responsibilities are often handled by mortgage servicing companies hired by the investors. Homeowners typically deal with a mortgage servicing company, but the mortgage servicing company must obtain approval from mortgage investors and insurers before agreeing to write down a mortgage loan amount. This process can be complex, and it’s unlikely that investors currently being reimbursed for foreclosure losses by FHA will be motivated to write down principal balances.
Rewriting FHA requirements for future mortgage loans insured by FHA could be an option, but FHA is currently between a rock and a hard place with its current commitment to reimburse lenders for foreclosure losses and the need for addressing problems caused by homes worth less than the mortgage loans financing them.
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